Sinch AB (publ)

Good day and welcome to the Cinch fourth quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Thomas Heath, Chief Strategy Officer and Head of Investor Relations. Please go ahead.

Thank you very much, Operator, and good afternoon, everyone who's joining us today for this results presentation for CINCH's fourth quarter 2022. My name is Thomas Heath. I'm Chief Strategy Officer and Head of Investor Relations. With me today is our CEO, Johan Helberg, and our CFO, Roshan Saldana. And with those opening remarks, I'll hand the word over to you, Johan. Thank you. Thank you, Thomas. And I think we can move directly to the next slide. Outline here are the three priorities we presented back in Q2 results. Executing on them in the stated order of priority. Starting with cost control, we announced the cost reduction program in the summer targeting 300 million SEK in gross savings. Next slide. When we look at Q4, we can conclude that our cost reduction plan has delivered faster savings than anticipated. Around half of the targeted 300 million CX savings has been realized. The chart shows how adjusted OPEX has developed. Yellow part show OPEX added from acquisitions in late 2021. And green part show organic development, where you see a flattening out after a sharp increase from early 21 to early 22. Q4 adjusted OPEX in CX is 2% higher than in Q22, but 12% lower in constant currencies. There are positive one-time rises in Q4 that reduce costs by around 60 million CX. in constant currencies and excluding these one-time items adjusted opex is eight percent lower in q4 compared to q2 next slide please we targeted a 10 reduction in messaging and central functions which is a little bit more than half of the opex space We can now see that the total restructuring charges will be lower than anticipated. We now estimate them to reach 80 million CET. Next slide, please. Higher adjusted EBITDA in Q4 22 than in Q4 21 on a full pro forma basis. This includes all entities in both periods. As we said in Q3, the fourth quarter is normally a strong quarter, which also means we normally have a sequentially lower EBITDA in Q1. Next slide, please. As in Q3, cash flow is strong also in this quarter. Cash flow from operating activities close to CF1 billion. One clear focus area has been reducing our overdue account receivables. And you can see on this chart that we have reduced these further to 60 days. So our three priorities were cost control, cash flow, and growth. We see a positive development on the first two. But we're, of course, not happy with the current growth rate, especially in the messaging segment. next slide please total growth is healthy with revenues growing 41 and gross profit 79 compared to q421 we have a strategy of combined organic and acquired growth and we see here of course that acquired growth contributes significantly looking at organic growth excluding m a It makes most sense to look at the pro forma figures for earnings from the acquisitions close in late 2021 or included from 1st of October to 31st December in both 2021 and 2022. Here we see pro forma revenue growth in constant currencies declining one year-on-year and gross profit increasing 3% year-on-year. The primary driver is reduced volumes in some marketing use cases, which we know from the past are more affected by business cycle. Q4 was softer than normal compared to Q4 in previous years for the messaging segments. And looking into the segments in more detail around messaging, We have a negative growth with revenues down 5% and gross profit down 8% in constant currencies. A large contributing factor is reduced pricing and volumes with one of our largest customers. This customer is shifting focus from growth towards profitability, which means some business is reassessed and exited. This is the same customer where we adjusted prices in Q2-22. Excluding this one customer, gross profit growth in messaging would have been positive in Q4. Here, the comparables will get somewhat easier from Q2-23, but in Q1, we still face tough comparables. For voice, revenue growth at 4% and GP growth at 6%. Here we continue to have a 5% headwind from AYY reform. Our growth rate here is held by a strong demand for our number of education products. But you should be aware that the comparables in this area will get more challenging during the year. E-mail. E-mail is performing well with 19% revenue growth and 20% growth and gross profits. The cloud migration project where we change vendors to achieve a more competitive cost structure has now been completed. For SMB, revenue growth is 16% and gross profit growth is 24%. We have highlighted a negative one-time effect in the base, which has a 12% positive effect on the pro forma growth rate in June 2022. So underlying GDP growth is at 12%, which is in line with Q3. What is happening under the hood here is that growth in North American S&V offerings continues very healthy, but at the same time, there are pressure on the installed base in Australia. So coming back to the bigger picture, we of course want to see higher growth rates than we currently see, especially in the messaging segments. This takes some time, of course. and the macroeconomic environment remains uncertain. This means that we are not expecting an immediate improvement. However, there are multiple initiatives ongoing where we are investing to increase our mid- and long-term growth. We are investing in product integration, making it easier to consume multiple Finch products. Most of our customers still use only one product. One such area is developing our voice offering and making more features available via Synch.com. We continue to integrate acquired platforms and move traffic to our mobile platform, both in messaging and S&P. Lastly, we also continue to invest in APIs and software for conversational messaging. Since we have profitable and cash-generated business, we are able to make targeted investments also in more challenging environments. So thank you, and handing over the word to our CFO, Roshan.

Thank you, Johan, and good day to you on the call. This is Roshan Saldana, Chief Financial Officer at BINCH. I will walk through the financial results in more detail. Please turn to page 10. where I speak on the fourth quarter highlights. We are satisfied to see a good development in the cross-production program, delivering results faster than anticipated. Around half of the targeted 300 million Swedish kroner gross savings have been realized, and adjusted OPEX in Q4 is 12% lower than in the second quarter of last year on a constant currency basis. The OPEX is held in the quarter with about 60 billion Swedish of runoffs, and excluding that, it would have been 8% lower in Q4 compared to the second quarter of 2022. We also see margin stability and retain good pricing ability due to the superior quality and value that we deliver for our customers. Dross margin in the quarter was at 33%, up from 26% a year ago. and 1.4% up from Performa Q4 2021. On the second priority of cash flow, we have yet another quarter with strong cash flow. Adjustability was at 960 million, and we had improved cash flow from operating activities at 973 million Swedish . This means that we were able to take our leverage KPI of net debt over adjusted VDA, excluding IFRS 16 leases to 2.7x compared to 3.2x at the end of September 2022. Please turn to page 11, which shows a bridge explaining our underlying gross profit development. In the fourth quarter, we had organic gross profit growth 2% and perform our organic gross profit growth of 3% on a constant currency basis. We focus on gross profit when we assess and steer our business. Consolidated gross profit rose by 79% during the quarter to 2.4 billion Swedish kronor and gross margin improved to 33%. The Swedish donor weakening against major currencies has grown by 156 million, or 12 percentage points, and the acquired companies during the last 12 months contributed 65 percentage points of the gross profit increase. Looking more closely at the individual segments in messaging, we have an organic growth in gross profit in local currencies and in comparable units at minus 8%. which is due to price reductions with a large customer previously announced in Q2 and weaker traffic compared to last year in the fourth quarter. Moving on to voice, on a formal and organic basis, excluding foreign currency effects, growth in the voice segment was at 4%. This includes a negative effect from the HYY regulation change in the U.S. with 5 percentage points. In the email segment, on a performance and organic basis, growth was at 20 percentage points, and in SMB, it was at 24%. The SMB segment is affected by a one-off negative impact in the base in Q4 2021, prior to acquisition, and excluding that, the growth would have been 12%, which is similar to what we had in the third quarter of 2022. Growth in the U.S. market continues to be strong for SMB, but that is offset by slower growth among larger customers in Australia. Moving on to page 12, you can see that the numbers on this slide are on a proportion basis, including all completed acquisitions. And it shows also the gross margin stability, which reflects the strength in our product proposition towards customers. We believe that we can improve this over time as higher margin products are growing faster. Q2 2022, as you know, was affected by a reassessment of reserves for approved traffic costs with 162 million Swedish kroner in the messaging segment. Adjustability margin also continues to be stable at 13% and is supported by the benefits of our program where half of the savings are now utilized. Adjustability margin in the messaging segment was 8% for the quarter. I'd like to move on to page 13 where we have the income statement. Consolidated net sales grew by 41% in the quarter to 7.4 billion Swedish kronor. The growth rate in the quarter was positively affected by previous acquisitions. On an organic basis, in local currency, the growth was minus 2%, and on a full-performer basis, in local currency, growth would have been minus 1%. Other operating income includes foreign exchange gains, related to operating items and reversal of a previous acquisition. APTA for the quarter was 791 million SEK up from 330 million last year. One of items as I have referred to already in operating costs and the adjusted APTA by 60 million SEK in the quarter. Adjusted APTA per share, came in at 1.13 for the quarter versus 0.31 during the same period last year. We made a goodwill impairment related to the email segment in the third quarter of 2022 of 5 billion Swedish Drona. And in this quarter, we have the currency effect related to that impairment of 97 billion Swedish Drona. EBIT came in at 66 million for the quarter versus minus 12 million in the same period previous year. Acquisition-related amortization, which does not affect cash flow, was 587 billion Swedish dollars. Adjusted EBIT, which excludes both items affecting comparability and amortization of acquisition-related intangible assets, was at $919 million versus $393 million during the same period last year. Moving on to slide 14, which shows the cash conversion. You will find a bridge from adjusted EBITDA to cash flow before changes in working capital and explaining the effect between these items. As in the previous quarter, we can calculate cash conversion after interest payments, taxes, changes in working capital, and investments in capex. In the quarter, we have a continuing strong cash conversion. We see a capital generation before changes in working capital of 661 million. We see total cash conversion of 82% in the quarter. which is aided by a positive change in networking capital. Even if we excluded the positive gain from networking capital, this cash conversion is still at 50%. On average, over the last 12 months, we have a cash flow conversion of 60%. Note that interest rates have come up. Effective interest rate in the quarter was 4.5% on an annualized basis. We also expect working capital to be more lumpy, and we do think we have unlocked a large amount of the working capital that was lost when we started this year. Please turn to the full chapter statement of page 15. We see a strong development in conversion of adjusted EBITDA to free cash flow from operations. Cash flow from operating activities after changes to working capital was 973 million Swedish for the quarter. Networking capital as a percentage of sales continues to be low at around 6%, which shows the applied nature of our business. In addition, during the quarter, we amortized about 600 million Swedish kronor of loans, and the group had a closing cash balance of 2.1 billion Swedish kronor. In addition, we had available bank overdraft facilities of 913 million Swedish kronor. Moving on to page 16, there you see the net debt over adjusted EBITDA, which is affected by three components. Adjusted EBITDA growth, cash generation from operations, and current impacts, which are immediate on debt, but we have a trading impact on earnings. EBITDA growth and strong cash generation caused net debt over EBITDA to fall in Q4 versus Q3. We expect continued deleveraging from earnings growth and cash generation. In the quarter, we also extended maturities for about 6.5 billion Swedish dollars and 110 million US dollars of existing credit facilities by year to 2026. And then moving on to page 17, we reiterate our financial targets to grow adjusted EBITDA per share by 20% per year and to keep net debt over adjusted EBITDA below 3.5% over time. Adjusted EBITDA per share grew 104% in the fourth quarter measured on a rolling 12-month basis. And net debt to adjusted EBITDA is at 2.7x, which is well within our financial goals. and we expect to continue to deleverage. For the last 12 months, there is no difference between performance and reported adjusted EBITDA, but this KPI excludes the impact of IFRS 16-related lease debt on both net debt and adjusted EBITDA. With those comments, I would like to hand over back to you, Juan, to summarize today's presentation and open up for Q&A.